Why was unemployment endemic during the interwar period?
This is my dissertation answering exactly that question, i got a first for it so i think it should answer it comprehensively.High levels of unemployment throughout the interwar period[1] persisted during periods of deflation in the early 1920s, as would be expected, but also through times of economic prosperity towards the second half of the 1930s. Therefore much debate resides around the subject and the causing factors. To understand the problem further, regard to the scale must be scrutinized.It becomes apparent in my readings that only an estimate on total unemployment throughout the period can be given, different historians have provided very different statistics regarding the level. Benjamin and Kochin offer their estimates. (Fig 1.1) Their unemployment figure for 1921-1929 is consistently above ten per cent, and then proceeds to rapidly rise 1929-1932 and then fall steadily, but it never reaches very much below ten per cent through until 1939. Conversely Feinstein offers an unemployment rate of 8.4 per cent for the period 1923-1929 [2] - a visibly lower rate than that of Benjamin and Kochin for the same period.YEARFig 1.1Reasons for the fluctuations in statistics for this period stem from the way in which they were compiled. None were taken for the entire labour force, insured figures are said to overstate the problem, and so only speculation occurs. Furthermore accurate comparisons to before the First World War prove impossible as statistics then were attained from trade unions which only covered a few industries; the same applies internationally. But however viewed the rate is at a level to conclude that a persistently high unemployment rate was a deficiency of the interwar period. The major peak in the early 1930s coincides with the major domestic and world recession, reaching in excess of the most conservative estimates, tallied at close to fifteen per cent, and on this graph at over twenty per cent. The smaller peak of 1926 which interrupts the negative trend experienced after 1921 can be attributed to the coal lock- out and the general strike. The earlier peak seems to coincide with Broadberry's study, which highlights the fall in hours for the working week coupled with the over-appreciated exchange rate to be some possible reasons as to why unemployment occurred. Conversely Booth and Glynn disagree with the precision of Broadberry's claims, which will be discussed later.The purpose of this short thesis is to present and analyse the considerations of both the a) contemporary authors- referring to writings during, shortly prior to, and very shortly after the interwar period and b) modern authors- referring to the writings of the years thereafter, on the subject of unemployment, or specifically the causes thereof. Having looked at the arguments to date, a consideration of the possibility of the presence of an efficiency wage during this period will be presented. A brief explanation of the main terminology and complexities that arise when studying the phenomena provide a good starting point for analysis of the debate.Many economists and indeed historians have different and sometimes conflicting views regarding the nature of the problem and its possible solutions. Throughout this study I will refer to the possible problems and causes of both voluntary and involuntary unemployment. Involuntary unemployment is that which arises through no choice of the employable body. Voluntary unemployment is that which occurs as a result of choice; the employable body chooses to not work for one or many of a number of reasons. The area of voluntary unemployment needs iterating due to its disputed nature and indeed questionable extent. The relevance to some works which will be analysed later, especially that of Benjamin and Kochin claim that voluntary unemployment was a very real problem during the period, however Eichengreen later provided research that is widely accepted to disprove the extent of their claims.Another important factor when considering the conclusions drawn throughout this thesis is the extent of econometric data available; we have very few points of reference from which to draw conclusions, usually only one figure per annum for each data set.IA major observation of the period is the geographical distribution of unemployment, the brunt of which was felt in smaller towns, usually reliant on one or a few of the staple industries. The decline in employment in these areas had knock-on effects which were endured by most of the local population. The 'outer' regions (North West England, Scotland, Wales and Northern Ireland) of Britain experienced the higher rates of unemployment. The 'inner' regions (South & Eastern England) experienced a relatively lower rate. It is from this point we can see that the distribution of unemployment was very swayed. Many communities became downtrodden and depressed, as the most hardcore levels of employment ever experienced by Great Britain erupted.Original ideas that Britain could not cope with the growing rate of unemployment were dismissed before the First World War by Beveridge[3] and so led thought to focus on the problems of specific industries and regions. Contemporary observers argued that, to a large extent, the problem of unemployment was structural in nature. By the eve of the First World War Britain had built up a huge dependency on the outside world for raw materials and due to this, reliability on a sound monetary and political climate. It is a problem of this dependency that led contemporary economists to observe this as a weakness, as indeed any dependency is. (It should be further noted that the advantage of world competition is apparent; evidence suggests that most competing countries, on the whole, have progressed as a result of competition). However it is these international problems that were stated to have huge negative implications on Britain's unemployment, indeed G. Cassel states: "It is certainly not necessary to search for more remote explanations of the widespread and protracted unemployment which has for some years proved such a great calamity to Great Britain."[4] He basis this statement on the argument that the disorganization of the world's trade was to blame; triggered by the failure to restore sound monetary conditions after the war and the unwise policies of suppression and exhaustion which took the place of real peace. His explanation provides a good starting point for our discussion. A look at the international 'trading-field' during this period shows a general fall in world income and high rates of unemployment, especially prevalent across Europe and toward the middle of the period the USA, two of the prime trading areas for Britain. The countries which used to sell produce to Central Europe found their buying capacity reduced as markets were squeezed, demand fell and widespread unemployment prevailed. It was due to the nature of these markets that lead to a very uneven distribution of unemployment in Britain. Export markets, found on the coastal regions of Britain, and those towns supplying their exports found themselves trending water as competition increased and world prices fell. The industries that endured the main brunt are generally categorized as the staple industries; the backbone of British trade. They included coal, textiles, iron and steel, shipbuilding and engineering, and other related industries. It was in these industries where the unemployment rate was two to three times the national average, but they were not the sole areas of unemployment, building amongst others was also affected.However Astor draws conclusions in the same publication as Cassel, stating that there was no cause for concern in regards to the unemployment level in Britain. He states that the abnormal unemployment experienced in the few years prior to his writings suggested to him that unemployment was neither chronic nor inevitable. Perhaps we could assume a slight rewording for modern literature in regards to his comment that unemployment was avoidable. I am sure when questioned Astor would allow that a natural rate of unemployment is always inevitable in a competitive market, due to the very nature of time lags within the labour market. The writings in this year (1925) emphasize that a large reliance for the economic wellbeing of Britain lay in her foreign markets, and any sustainability and expansion thereof. Not only in terms of the growth of industry abroad and the filling up of less densely populated areas of the world, but also in the rise of material standards of poorer nations abroad, thus creating greater demand. Assuming the conclusions made by Astor that the problem was neither chronic nor inevitable to be correct then it appears that something unforeseeable happened over the following years that proved a stigma for Britain.In light of Cassel's view expressed above, we are introduced into one of his possible solutions to the high rates of unemployment, which by modern political ethics proved most comical. He declared it a 'necessity' for Europe as a whole to create new markets and secure new sources of supplies from other resource-rich parts of the world. He exclaimed: "This is work which must always go on as long as such districts exist and as long as the white race still possesses a power of expansion."[5] We can safely ignore this solution of encroachment to any rising unemployment issues on moral grounds alone, but it should be duly noted that at the time this was not seen as an impossible solution. A further look at more plausible ideas can help us through the problem further.The conclusions of the contemporary debate, especially those written earlier in the period, appear to focus much more on the problems on a micro-level rather than viewing the problem as a whole. A short study of the coal industry allows speculation towards some of the quandaries of the time. It was an industry of huge scale, with one-fifth of total production going to export. Figures from 1923[6] state over one million persons were employed in the industry, and indeed it was felt by some contemporary theorists during the period that the way of fixing the problems in Britain was to start with the restructuring of the coal industry. Hence the reason for my focus is apparent. The increase of production in the industry through the opening of new coal-fields and collieries, rather than the expansion of the old pits proved to be the very downfall of the industry for the rest of the interwar period. New enterprises often incorporated new technology; the bar was constantly being raised, and so led Clay (1929) to place emphasis on the war, and post-war boom as giving a new lease of life to mines that would, had it not been for the war, have been forced to close. This caused a reduction in efficiency amongst the industry as a whole which, he claims, can only be viewed as a negative aspect. It was the scarcity and high cost of coal, that on the surface one would assume to aide the industry that culminated in a growth of competition. The high prices compelled former customers to seek alternatives, and subsequently an expansion of competing supplies, which included brown coal, hydro-electric power schemes and also oil. One cannot really place too much blame on the coal industries haste towards change, after all the occupation of the Ruhr by France and Belgium did mislead British activity in the early part of the period, alongside rapid over expansion throughout the war.Was it this expansion of coal that lead to the demise of the ship building industry in Britain? If one is to concur with Clay (1929) then we can probably deduce a 'yes' answer. The ship-building industry lost a major amount of its trade due to the expansion of the oil industry throughout this period, and was only really on the road to recovery as the heavy industries expanded again for the few years prior to the Second World War. The results; a rate of unemployment in areas with a high amount of ship building were second to none. A consideration of the nature of the ship-building offers a very obvious conclusions as to why these areas were to suffer most; it would take a substantial number of men to build one large ship, but once that contract expires there were then a substantial number of men unemployed until another was found. Sadly a thorough discussion of industry is beyond this short piece, and so it is away from this taste of microeconomic aspects of the problem from which we must turn. Nevertheless a whole host of more general complications offer themselves, brought to light in contemporary and modern literature alike.IIDiscourse in the mid 1970's[7] led Benjamin and Kochin to present evidence to provide an explanation of one-third to one-half of total unemployment during the period. Their estimate, if not overly zealous, stems from research that asserts that "The persistently high rate of unemployment in interwar Britain was due, in a large part not to deficient aggregate demand, but to high unemployment benefits relative to wages."[8] According to their assertion Britain's generous unemployment payments were, to a large extent, a basis for blame; the benefit rates were high enough to provide a genuine alternative to wages. However their figure is contested in Eichengreen (1987) who claims that, using data from 'The New Survey of London Life and Labour'- a survey conducted during the interwar period post 1928, that the figure was nearer one fifth. It is at this early point the need to stress my concern with both sets of figures.Firstly, on the surface alone, Benjamin and Kochin's upper limit of fifty percent of total unemployment being due to involuntary unemployment appears very high.Unemployment in interwar Britain encompassed two different phenomena: One side of the equation saw a smaller number of persons, mainly those older, and thus less able to move from job to job, being part of the long-term unemployed. The other offers a movement, a constant churning of labour, where unemployment would last only a short duration and was transient in nature, of which they claim the insurance system was in part, due to the ease of obtaining payments, to blame. The long-term unemployed, whilst fewer in number still took up a substantial amount of the days lost throughout the period. A careful consideration of a typical working man in the period would offer a stereotypical view of a hard working individual who feels the need, either instilled within him, or a societal expectation, to provide for his family. Of course there were exceptions. I am acceptant that amongst any society 'free loaders' will exist. Indeed, Michael Richards, the sullen, despondent character introduced to us by Eichengreen in a later study provides an example of what he claims to be the 'involuntarily' unemployed.[9] However, we can assert that this caricature of a sullen despondent man could eventually become part of the 'voluntarily' unemployed in the long-run, due to the eventual unwillingness of a man in his situation to bother seeking employment any longer. Further consideration into the second half of the 1930s when prosperity in the staple trades improved, provides evidence that men in such situations became completely detached from working society, eventually choosing to no longer seek employment. Hence were these the voluntary unemployed Benjamin and Kochin were referring to, or was it those who could survive by adopting such things as short-time working? Probably the latter, but the previous analysis of a transition from being part of the involuntary and eventually becoming the voluntary unemployed, displayed in my thoughts on a character like that of Michael Richards, could aide their figures further.During the interwar period short periods of unemployment could be combined and were, under the generous benefit system, classified as a continuous episode of unemployment. This type of employment went on during the period in such industries as textiles, mining and metals, possibly augmented by the insurance system[10]. The 'oxo' system was used to alternate days of work, (where 'O'= a day of employment and 'X'= a day of unemployment) between the workforce, and it is very much open to debate as to what extent the insurance system aided this system which had already been in use before the Great War. The reasons for this type of unemployment must be deeper rooted, a problem of industries, and an inadequacy of demand, not a consequence of this type of action, although it does significantly affect the figures of unemployment.In addition to this a consideration of the extra leisure time gained from unemployment, weighed against the level of benefits should be noted as a factor to assist Benjamin and Kochin's belief that so many would actively choose not to work. It should be mentioned also at this stage that the fall in working hours experienced in 1919, which Broadberry and Dowie both highlight, would only go to further reinforce their assertion, which will be discussed later.Secondly I find problem with the geographical and therefore economic region from which Eichengreen draws his long-term conclusions. The original survey's sample is representative of a sample of those living in the Greater London area. This caught my immediate attention and was duly mentioned within the article, however I feel due to the regional distribution of unemployment throughout the British Isle's that his study is one of geographical discrepancy. It is important to consider the localised aspects rather than the subject of Great Britain as a whole. With this I assert that the morale of an unemployed worker in London cannot be compared to that of a depressed individual dwelling in a depressed mining town in northern England where more were unemployed than not, or indeed that of a ship builder waiting for a contract by the river Clyde. The areas of the South East & London were of relative prosperity and relatively low unemployment levels during the period,[11] and I therefore discredit the accuracy of Eichengreen's claim that his figure based on this evidence, would be the upper bound, due to the nature of the long-term aspects of the transition from involuntary to voluntary unemployment as mentioned in reference to Michael Richards above. I am aware that the incidence of voluntary unemployment within a tight labour market, compared to that of an area experiencing mass unemployment is high due to people being more willing to circulate between jobs as Eichengreen claims. His figure would hold in the first half of the period and may indeed offer an 'upper bound' as he claims, yet the need to stress the long-term effects of unemployment, eventually leading a potential employee to be voluntary unemployed should be duly noted, and consideration to a possibly higher upper bound in light of this for the few years of the interwar period. Even in light of this I believe Eichengreen's figure to be closer to the truth; largely owing to the distribution of age range in London at the time; a disproportionate number of twenty to forty-five year olds resided in London, and were therefore most likely to move from job to job, with a short period of unemployment between each.The main evidence to support Benjamin and Kochin's claim is concentrated by Eichengreen to be two-fold: Primarily he attacks their figures that suggest that the less generous benefit system given to juveniles was responsible for the lower rate of unemployment that they experienced. Unemployment amongst juveniles for that period was 5.0 per cent during the period 1924-29, compared to that of 14.6 per cent endured by the total average working population. He claims that in using statistics from the Employment Exchange, as Benjamin and Kochin's evidence do, tainted results will occur. Only those whom had made the 20-30 weekly contributions required to qualify to receive benefits had a compelling incentive to register their books at an Employment Exchange. He does however stress that some of the ineligible workforce may have used the Employment Exchange's placement programme but draws data presented by Roker and Scott[12] to suggest that "such a tendency was slight"[13]. Furthermore an argument on the same lines is used by Eichengreen to argue against Benjamin and Kochin's explanation for the sharp fall in the unemployment rate amongst women in 1931 after Parliament adopted the Anomalies Regulations[14]. This fall is interpreted by Benjamin and Kochin as the impact of the scheme working to stop voluntary unemployment. However the counter arguments recently after the release of the paper led them to concede that the system may not have reduced unemployment[15]. The second fault identified by Eichengreen derives from Benjamin and Kochin's use of regression analysis. Discrepancies over the adequacy of their data occur due to the difficulty of credibly testing models of individual choice using aggregate statistics. Owing to this Eichengreen offers his own investigation.Data collated from 3000 males in a survey of working-class households undertaken in London during 1929-30 provide conclusions using detailed information about the earnings and employment status, age and number of dependants, and also family circumstance. Due to its detailed complexity the survey offers viable conclusions. Eichengreen divides the adult males studied in the report into a) Household heads and b) Non-Heads. He deduced that no real impact was felt if the benefit to wage ratio changed for household heads, but a significant positive correlation was experienced amongst non-heads. The conclusions state that a fall in unemployment of between 1.2 per cent and 1.8 per cent for the population of London would have transpired if the benefit to wage ratio fell to the level experienced in 1913. His counterfactual figures offer no real change for household heads, but a significant change for non-heads. But as these non-heads only accounted for twenty-three per cent of the sample the general figure was not reduced substantially. In light of his own investigation Eichengreen speculates that; "It would appear that Benjamin and Kochin's army of the voluntary unemployed was essentially a squadron of secondary workers.[16]"As we have already seen the mass unemployment experienced in the interwar period was also one of a serious relief system. It was the first time a serious relief system was introduced in Britain, prior to its introduction long-term unemployment would lead to a serious fall in health amongst the general population. It was indeed observed by J Astor in The Third Winter of Unemployment that "The progressive deterioration which inevitably attaches itself to the condition of being maintained without work, of which fears were entertained, is not yet evident on any extensive scale"[17]. A different story to that mentioned later by Eichengreen (see footnote 9) who states Michael Richards blamed his poor health as the reason why many a foreman had turned him away. Eichengreen's caricature seems like a more plausible idea even though this is contrary to reports made by the Ministry of Health[18]. Reports claimed that the observations of poorer health in areas of high unemployment were invalid; asserting these types of people already had a history of poor health. Plausibility for Astor's observation if not a little early on in the interwar period (1922) and also that of the Ministry of Health are challenged in modern studies. Harris[19] (1988) used observations from physiological documents on nutrition and stature to examine the effects of malnutrition amongst children between the years 1923 and 1938. He concluded after using the information gathered that there were falls in their stature, a widely accepted measure of nutrition, in relation to the unemployment rate in a wide variety, but not all middle income towns. His conclusion for poor areas offered results that allow us to infer no real change in the stature of the children. He advises that due to their nutrition already being at a low standard by national terms that the benefits were high enough to satisfy all of the families' nutritional needs, but not their psychological requirements in areas where nutritional standards before the period were already very low. This lead Harris to further suggest that the reason why these contemporary thinkers disregarded the problem was that it had no real effect on poorer areas, but rather on those 'middle-income' towns.However poverty-surveys attributed the problem of hardship to be one mainly associated with unemployment, so where was the benefit system, which many households were receiving, slipping up? Hatton[20] asserts that sixty-six per cent of households in Southampton in 1931 and a forty per cent rate in London 1929/30 were below the poverty line. He concludes that the benefit system allowed that a family of four with benefits of 28s and no other resources would have been in desperate poverty, but if the male breadwinner had spent six months out of the year employed the family would still have been above the human needs poverty line. This would support claims that the long-term unemployed suffered the most during the period, furthermore reinforcing the plausibility of Eichengreen's character; Michael Richards, which I claim earlier, would have eventually contributed to an increase in the number of voluntary unemployed.One agenda that became apparent amongst contemporary historians was the distribution of how relief was provided. They called for the centralisation of the relief system. Indeed Astor (1923) claims "A depression, due less perhaps than any previous depression in modern times to local causes, is left to a considerable extent to local authorities to relieve"[21]. This would go some way to explain some of the early suffering and considerable suffering in certain regions, where funds were just not made available, and furthermore the regional depression experienced. Resort to the Poor law was undesirable[22]. Due to this Astor claims that it was undesirable to force already distressed males into using it. From his remarks we can assume further psychological distress amongst males from such policy if his changes were not met. He further points out that the restriction of assistance to especially distressed localities should be lifted. The lifting of any of these types of restrictions would only aide the distribution of wealth amongst the population, a problem that perhaps a more intuitive government would have assumed at an earlier date.IIIMany arguments to support the view that unemployment was of an involuntary nature have prevailed since the period itself. It is here we will begin to investigateBeveridge (1944) expressed the view that the problem was not one of cyclical fluctuations, or the disorganisation of the labour market but a demand-side problem; a problem of involuntary unemployment only. "It is clear that between the two wars any unsatisfied demand for labour was trifling in quantity and transient in duration. Even the year 1937 remained for most industries a time with many times as many unemployed men as vacant jobs.[23]" Immediate thought would question the mobility of labour; would a more mobile workforce have allowed those living in depressed towns to change industry and furthermore help solve the problem? It is noted that there was hardly any unsatisfied demand between the wars, that it was not a cause of friction in the labour market. However we can deduce that perhaps friction was present. Geographical immobility of labour was present, and if one agrees with Eichengreen's claims that friction was caused by workers claiming benefits, then we can see evidence of such occurrences. It should also be further noted that his work only points towards the recorded unemployed. Furthermore geographical immobility and also a skills gap within the workforce could explain some of the deficiency in demand earlier in the period. Had the workforce have had increased mobility, especially geographically then perhaps acceleration out of the problem would have occurred at a quicker rate. Having better skilled workers available when making selection would increase productivity further, and thus reduced costs for employers, further increasing their competitiveness. Astute government intervention, although not instant due to time lags, would have assisted the problem further; a comparison to modern-day labour flexibility would demonstrate this in action. Once again, the typically Keynesian claims that a deficiency of demand was the sole cause of the problem is disputed, which leads me to remind that the period experienced both involuntary and voluntary unemployment.The real wage debate offers a very wide scope of speculation. The main arguments surround the causes of the high real wage rate, however little discourse has found a fully plausible reason as to why the real wage rate did not fall in the face of rising unemployment, that is to say why was there a disequilibrium? To further understand we must analyse what aspects have an effect on the real wage: The reduction of the real wage rate is possible from two different angles. Firstly it can be attacked with a reduction of the nominal wage or conversely from an increase in the general price level (RPI). Or more simply the real wage is the wage relative to prices.Indeed the debate has lead to apparently conclusive information. The disaggregation of real wages away from the equilibrium rate led Beenstock & Warburton to conclude that three-quarters of jobs in the period 1929-31 were lost due to the real wage rate being too high.Throughout 1919 especially, and also to a lesser extent during 1920, a sharp reduction in the average working week was experienced in Britain. A general agreement that the decline in hours experienced during this short period was tallied at thirteen per cent; that is to say a reduction from fifty-four to forty-seven hours per week. Feinstein, Mathews & Dowie agree, although it is Broadberry's study which proves must lucrative, as an explanation as to why this happened is offered.A reduction of hours, it is claimed, was a result of a 'build-up' of frustrated consumer demand throughout the Great War, which in turn led to workers requesting more leisure time rather than higher wages. His declaration, although he claims conclusive, is very much open to debate, as are most possible explanations for a high unemployment rate throughout this period. A rise in small savings, as a result of shortages and controls during the Great War, is attributed by Broadberry as the deciding factor when workers made their decisions for negotiation. This reduction in hours coincided with the fall in price levels which, triggered by the government's policy to restore the gold standard at pre-war parity, which piloted an increase in the real wage rate, a role many economists would agree bears great significance in increasing the unemployment rate. I am acceptant of all of his points, except for his explanation of why the reduction of hours occurred.Evidence is drawn from a study by Morgan[24] stating three types of small savings occurred; deposits in Post Office and Trustee Savings Banks; securities purchased through these banks and also War Savings certificates. However it is not the evidence that these savings did occur that causes concern, but more an analysis of who would have been saving during the war. It certainly would not have a major impact on those poorer families, whom would have had a much higher propensity to spend close to all of their monies than those of middle and higher income families. I postulate that much of these types of savings would have occurred in these latter cases, indeed Glynn and Booth assert the composition of working-class savings would have mainly been directed towards 'funeral clubs' and industrial insurance companies. Perhaps then Broadberry's analysis has a flaw. Those on higher income brackets would surely not be employed in the staple industries, but more likely merchants, bankers and those jobs requiring a higher standard of education and or brain power. They did partake in negotiations with unions, but their bias could not sway general real wage statistics so violently so as to make them appear high for Great Britain as a whole. Furthermore a small increase in savings would not necessarily confirm a general will for a reduction in the working week. Perhaps in light of victory a sense of liberation swept across the country, the general consensus of pride and indestructibility that was felt across the country could be reflected in a congregating of the labour force to agree to fight for better conditions for themselves and their families. A bloody massacre such as that experienced in the years 1914-19 would surely reinforce the family bond; perhaps then realising they wish to spend more time together and with friends. Alternatively the technological improvements that had occurred prior to the war and that continued throughout, may have allowed the decline in hours at an earlier stage, but the war effort intervened, not allowing the labour force to push for a shortening of the working week until the war ended. Whatever one's hypothesis, there are many feasible explanations. It is once again the grouping together of differences that statistics overlook which raise cause for concern. Furthermore Broadberry's explanation would only suggest why the real wage rate was high for a few years after the initial fall in hours, and not its continuation throughout the period.Many contemporary observers experienced the rise of trade unions; they watched their power fuse together from a local to national basis, thanks in part to the recommendations of the Whitley Committee in 1917, which resulted in the formation of the Joint Industrial Councils. Negotiations were no longer decentralized, as agreements were reached on a collective basis. The interwar period was one of unrest; worker disputes culminated in strike action both by industry and eventually as a whole. The unions recognised their power by bringing entire collieries and suchlike to a standstill, demanding their requirements be met.The problem of a disproportionately high wage rate is by no means a new theory. Henry Clay (1929), a contemporary economist, and also slightly later A. Pigou blamed the increased strength of trade unions throughout the previous few years as the problem. They placed emphasis toward the extent to which wages were governed by traditional custom rather than the current economic climate. Furthermore emphasis was based by the two on the insurance levels of the period and how these were affected due to this increase in union power. Pigou (1944) highlighted the 'new situation' of an insurance level close to the real wage as being a reason for increased unemployment, yet his comments came much later than Clay, whom in 1929 stated; "To-day trade union negotiators can afford to take the risk that a wage-rate on which they insist will cause un-employment, because their constituents will be provided for by the national relief scheme"[25] The union negotiators no longer possessed as much concern for the outcomes of pushing for a higher real wage in light of an insurance system that proved more generous than any had previously moreover the insurance system meant workers had a level of subsistence to fall back on if wage rates were set too high. He claimed this was a deciding factor, but unlike Benjamin and Kochin's view, which was an issue of choice, the fall in the employment rate was both involuntary; a problem caused in part by union negotiators. Why didn't the union negotiators account for the unemployment rate amongst their workers then? The answer is apparent when viewing the poor wage rates of those employed in the industries with an already high unemployment rate. To request miners, or skilled steel workers and engineers to accept a wage cut, was to "invite opposition"[26]. It could not be expected that these workers would accept a lower wage-rate than those of equal or lesser skill in more profitable or sheltered industries. Furthermore a look at the reaction of the coal industry to an increase in hours worked and a reduction of wage rate only seemed to make the prospect of the skilled workers changing their decision dismal. Those economically uneducated workers observing from outside the industry were to adopt a negative impression of the coal industry, yet the greater elasticity of their goods may have possessed a decidedly different outcome for their industry.A further look at the over-appreciation of sterling in the hope of returning to the gold standard proved to be a downfall of policy makers. The fundamental idea would suggest competitiveness was saturated by an overvaluation of sterling. An over-valuation of sterling implies that the cost of buying British goods was more expensive abroad than would have been if the valuation of Sterling was less. Thus exports from Britain become more expensive to those buying abroad, and the price of imports for British purchasers fell. The industries working for the home market, protected in one way or another from foreign competition were able to keep up their prices, thus covering their costs which had not been adjusted to the level of prices of world gold. On the other hand the export industries had to bring their prices down to the world level, while costs for them remained at the inflated paper level at which they stood when the gold standard was fully restored. This handicap was only worsened by the deflation endured by Britain, when compared to the inflation felt by her competitors.[27] Keynes recognised the problem, and it has subsequently been reinforced by many modern economic historians.[28] The elevated real wage rate meant costs for industry were kept high, whilst prices abroad were low; Thus competitiveness was compromised: a serious concerns for the foundations of Britain during the period.IVOne short-term avenue of explanation toward the high real wage rate early on in the period may be viewed in consideration of the situation for the two years after the First World War, when their were high inflation levels experienced by Britain. Trade unions and their workers were used to demanding a real wage rate above the level needed at the beginning of the year when the negotiations were taking place in order to account for the rising inflation rate over the coming twelve months. This was due to the general way in which negotiations were undertaken, usually only once annually. Indeed this would be reinforced by Bowley (1925) who identified that in a situation where inflation was rising by two or three per cent a month, wages would tend to lag behind. Trade unionists would have been aware of this and negotiated with an estimate of the inflation in mind. Thus a false expectation of a high inflation rate would lead them to demand an increased nominal wage rate, and therefore an over inflated real wage rate would occur. However if this were true it would only explain a high real wage rate for a short period of time, possibly one or two years, as serious deflation struck soon afterward.An additional area for consideration stems from modern economic theory. Throughout the discourse I have noticed no mention of the model of efficiency wages offered by Shapiro & Stiglitz (1984) as a possible cause of wage rigidity and furthermore unemployment during the latter half of the interwar period. In brief the theory states efficiency, defined as a mixture of education and motivation, to be a key factor when employers set the wage rate to attract workers. In offering an 'efficiency wage', a wage higher than the market average, an employer aims to attract a better quality of worker.It becomes apparent that these offerings of a higher wage rate would not directly exist in the staple industries, where a huge pool of the unemployed were stationed, and wage rates were usually negotiated by unions, but rather in the more prosperous, non-unionised industries. The theory could help to explain, how the problem of the generallyhigh real wage rate, evident in the figures offered by Beenstock and also Broadberry, may have occurred. However the difficulty with this theory is evident in proving it to be more relevant to this period than any other. A thought experiment may help our understanding further.Consider; an employer within a prosperous industry during the interwar period is trying to attract a worker. There is a sea of unemployed, but few meet the criteria which he requires for the position he is aiming to fill. His way of attracting an employee is to offer a wage rate slightly higher than the market average for that industry. Assume the 'new' industry requires a certain level of skill amongst the positions he is trying to fill. These skills take time to acquire, and thus if there is a shortage of people with these skills then an excess demand for this type of labour will occur. Therefore the employer may be forced to attract potential employees with a higher than market average wage rate. Now other employers in the same field take note, and start raising the wage rate that they offer in order to attain the skilled employees also. This evidence would suggest a greater amount of money would then be in circulation in these areas and thus localised inflation may occur, driving the nominal wage rates in these local areas upwards, whilst their relative local real wage rate would remain similar. This would be due to the prices in that local area rising at a similar rate to the nominal income increments; the process of localised inflation explainable by the circular flow of income. These workers could explain to a small extent the disequilibrium of the real wage rate in this period. However further consideration into their effects on unionized work pay rates may result in further evidence.If, Henry Clay's[29] observations are true; that skilled workers in some industries were unwilling to accept a fall in their wage rate then there is good circumstantial evidence to suggest that the effects of efficiency wage theory could have had reaching impact into unionized wage bargaining. He claims that their reasons for declining a fall in their wage rate was due to observations they made of 'less-skilled' workers possibly earning higher wage rates than themselves, therefore culminating in a push by the workers for a wage rate of a similar fee. If indeed the wage rate of the 'less skilled' workers was an efficiency wage then we can see an effect on the unionized real wage rate during this period..It should however be noted that the extent to which this happened cannot be proved; it is in fact even in modern terms fairly difficult to prove with the use of statistical data to what extent this type of activity occurs, and also its true effect on the economy as a whole. A survey with the possibility of interviewing employers during the period would offer answers to questions enquiring to their wage setting habits. However I feel that it is worthy of discussion as it could play a role in trying to explain to a small extent why exactly real wage rates were higher than the market suggested.The argument for the use of efficiency wages could be further strengthened, but in the opposite direction, for those, who had, in the latter third of the interwar period become part of the long-term unemployed. These workers had, by this late stage, become poor substitutes for those which had managed to regularly find employment throughout the period. As a result of their undesirability a fall in the real wage rate to attract these long-term unemployed into employment was no longer attractive to a potential employer. As Hatton stated "These 'outsiders' did not effectively compete with the 'insiders' for jobs. Firms would have been reluctant to cut wage rates to employ outsiders for fear of losing the more productive insiders."[30] (The term 'outsiders' is referring to those who experienced long-term unemployment. The term 'insiders' refers to those who had not). Hence an employer would be offering an efficiency wage in this manner also. Akerlof and Yellen (1990) offer a version of efficiency wages in which they state higher wages encourage high morale, which increases worker productivity. Their version of an efficiency wage would also fit with this period. The rise of hourly labour productivity from a base index of 100 set in 1913 rising to 130 by the year 1937 would correspond with their theory of efficiency wages. So we can see an efficiency wage could be used at either end of the spectrum; to attract the best skilled workers to the job in some fields, and also to repel those poorer employees in others, keeping productivity high.VIt was the prospect of the Second World War that spelt the end of the legacy of mass unemployment. Stimulus for re-absorption of the labour force arrived in the form of rearmaments coupled with a move of many unemployed into the armed forces. The British government's tribulations had moved away from what appeared to be a new naturally high rate of unemployment and onto a much more important issue, war.In conclusion, the enigma of British interwar unemployment has provided very few certainties. The 'tour de force' of the British government in choosing to over-appreciate the economy proved problematic for key export dependant industries. The lack of competitiveness of the British firm throughout this period dominates, and when coupled with the deficiency of world demand proved that this period was to be the most troublesome for employment within Britain. The world depression in the 1930s only served to offer further hurdles after the already high rates of unemployment experienced in Great Britain throughout the 1920s. Modern debate picked up on the problems identified by contemporary observers. The problems transpired from industry, and the ever growing power of the trade unions. Was it the trade unions that proved the calamity for the high real wage rate, aided by a generous unemployment system as some would have us believe, or other factors? The lack of information from the period and focus of particular studies does little to help piece the jigsaw together, however a few certain conclusions can be drawn. The real wage rate was at a high level during the period, industry did lose out to foreign competitors, both due to their relatively high prices in light of new competition and also thanks to foreign protectionist policy. Suffering and unrest prevailed as some gave up the will to seek employment. Over-capacity, built up during the war, which left far too many people in declining industries, with little hope of acquiring employment elsewhere. We can categorize the main problems into two broad categories; voluntary unemployment and also involuntary unemployment. Both of which I feel have proved to prevail throughout the period. However I feel the level of voluntary unemployment could be higher than the twenty per cent offered by Eichengreen, but never reaching anywhere near the fifty per cent offered by Benjamin and Kochin.On a final note the theory of efficiency wages when applied to this period could answer some questions; the evidence of increasing hourly productivity rates, coupled with the regional disparities offers some plausibility for the theory to be a possibility.[1] The Interwar Period (1919-1939) - defined here by the end of the First World War and the beginning of the Second World War.[2] Figures taken from: C.H. Feinstein, National Income, Expenditure and Output of the United Kingdom 1855-1965, (Cambridge University Press 1972), Table 128.Fig 1.1 Figure taken from: D. Benjamin & L. Kochin, "Searching for an Explanation of Unemployment in Interwar Britain", The Journal of Political Economy (1979), 87: p444[3] For further information: W. H. Beveridge, Unemployment a Problem of Industry, (London, Longmans, Green and co., 1910) p235[4] G.Cassel, The Problem with Finding Employment, in: J.Astor, Is Unemployment Inevitable?, London, Macmillan & Co. Limited , 1925), p134[5] Ibid, p138[6] W. Thorneycroft, Future of the Coal Industry in Relation to Unemployment, in: J. Astor, Is Unemployment Inevitable?, (London, Macmillan & Co. Limited, London 1925), p228. Asserts the exact figure taken in March 1923 to be 1,095,789 persons employed in the coal industry, not including those men working at coke ovens, brickworks, or other industries carried on adjacent and ancillary to collieries by the same owner.[7] D. Benjamin & L. Kochin assert that their ideas stem from 'Feldstein' 1973, 'Hoelen and Horowitz' 1974, 'Grubel, Maki and Sax' 1975, and 'Maki and Spindler' 1975[8] D. Benjamin & L. Kochin, "Searching for an Explanation of Unemployment in Interwar Britain", The Journal of Political Economy (1979), 87: p474[9]Caption taken from: Barry Eichengreen, "Unemployment in Interwar Britain" Institute of Industrial Relations. Institute of Industrial Relations Working Paper Series. Paper iirwps-013-88, November 1988 :http://repositories.cdlib.org/iir/iirwps/iirwps-013-88/"It was the winter of 1935. Michael Richards had been without steady work for nearly five years. Initially confident of his ability to find another job, after months of frustration he grew sullen and despondent. At first, his 32 shillings a week in benefit had been enough, after rent and expenses, to put food on the table for his wife and three children. But after exhausting his entitlement to unemployment insurance benefit, Richards was forced to turn to the meager 22 shillings of means-tested relief provided by the Public Assistance Committee. Potatoes and turnips replaced meat on the table, and even that was in short supply. Smith's children seemed small compared to their classmates. He himself blamed inadequate diet for the hacking cough which had caused many a foreman to turn him away. The search for work being futile, he spent most of the day on the street commiserating with his mates"[10] N. Whiteside and S.Gillespie, "Deconstructing Unemployment: Developments in the British Economy in the Interwar Years", Economic History Review (1991), 44[11] Tim Hatton states the figure to be around eight percent as taken from The Ministry of Labour's statistics in: T. Hatton, Unemployment and the Labour Market in Interwar Britain,in R.Floud & D. McCloskey (eds.), The Economic History of Britain since 1700 2nd edn., Vol.II, p365[12] Roker and Scott (1926), p.64, in their study of boys in Bermondsey, found that only five percent of the school leavers surveyed obtained jobs through the Exchange.[13] B. Eichengreen, "Unemployment In Interwar Britain: Dole or Doldrums?", Oxford Economic Papers (1987), 39: p598[14] Ibid,. Eichengreen notes: The Anomalies Regulations required married women to have made fifteen weekly contributions since marriage and eight over the preceding six months, or to prove that they both were actively seeking employment and stood a good chance of acquiring work.[15] Benjamin and Kochin, "Unemployment and Unemployed benefits in 20th Century Britain: A reply to our critics" Journal of Political Economy (1982), 90: p416[16] B. Eichengreen, "Unemployment In Interwar Britain: Dole or Doldrums?", Oxford Economic Papers (1987), 39: p601[17] J. Astor, The Third Winter of Unemployment, (London: P.S King & Son Limited, 1922)[18] Information obtained from: Barry Eichengreen, "Unemployment in Interwar Britain" Institute of Industrial Relations. Institute of Industrial Relations Working Paper Series. Paper iirwps-013-88, November 1988 :http://repositories.cdlib.org/iir/iirwps/iirwps-013-88/[19] B. Harris, Unemployment, Insurance and Health in Interwar Britain, in: B. Eichengreen and T.J Hatton (eds), Interwar Unemployment in International Perspective, (Martinus Nijhoff , 1988) ,p.149-184[20] T, Hatton, Unemployment and the Labour Market in Interwar Britain, in: R, Floud. & D, McCloskey, (eds.), The Economic History of Britain since 1700 2nd edn., Vol.II, (Cambridge: Cambridge University Press, 1974) pp. 336 -337. The poverty line used in these surveys from which he draws his data was established by Rowntree in 1899 which allowed, in addition to rent, a minimum expenditure on food, clothing and a few other essential items[21] J. Astor, The Third Winter of Unemployment, (London: P.S King & Son Limited, 1922): pp. 78[22] Ibid: pp. 80[23] W. Beveridge, Full Employment in a Free Society, (London: George Allen and Unwin Limited, 1944), pp. 89[24] E. Morgan, Studies in British Financial Policy, 1924-25, (Macmillan, 1952)[25] H. Clay, The Post-War Unemployment Problem, (London: Macmillan and Co., Limited, 1929), p155[26] Ibid: p155[27]H. Clay, The Post-War Unemployment Problem, (London: Macmillan and Co., Limited, 1929: p. 148 Discussed further.[28] Further listings can be found in: N. H. Dimsdale, "Employment and Real Wages in the Interwar Period", National Institute Economic Review (1984): p103[29] H. Clay, The Post-War Unemployment Problem, Macmillan and Co., Limited, London (1929), p155[30] T, Hatton, Unemployment and the Labour Market in Interwar Britain, in: R, Floud. & D, McCloskey, (eds.), The Economic History of Britain since 1700 2nd edn., Vol.II, (Cambridge: Cambridge University Press, 1974): pp. 383
